Okay, This Time Matt Taibbi Nails Goldman And The Bailout

“Goldman will surely deny that its risk-taking is subsidized by
the taxpayer -- but then so did Fannie Mae and Freddie Mac, right
up to the bitter end. An implicit government guarantee is only
free until it's not, and when the bill comes due it tends to be
huge. So for the moment, Goldman Sachs -- or should we say Goldie
Mac? -- enjoys the best of both worlds: outsize profits for its
traders and shareholders and a taxpayer backstop should anything
go wrong.”

“So what’s wrong with Goldman posting $3.44 billion in
second-quarter profits, what’s wrong with the company so far
earmarking $11.4 billion in compensation for its employees?
What’s wrong is that this is not free-market earnings but an
almost pure state subsidy.”

Pop quiz: which one of the above quotes comes
from Rolling Stone’s Matt Taibbi and which comes from the
editorial page at the Wall Street Journal.

We’ll get to the answer in a bit. What fascinating is that it’s
so hard to tell which is the long-standing voice of capitalism
and which is the writer for the one time icon of the
counter-culture. To put it differently: what could have brought
us to the point where both are aiming their scornful analysis at
the most successful firm on Wall Street?

In a word: Bailout.

It’s taken some time but finally people from all over the
political spectrum are looking up and noticing that the banner
waving on the flagpole stands for Bailout Nation rather than the
land of the free. And they’re pissed.

Not everyone understands why they are pissed off. For instance,
the Congressmen grilling Hank Paulson today are thoroughly
confused. Some want to know why Paulson didn’t fire Bank of
America CEO Ken Lewis. Others want to know where Paulson got the
temerity to threaten Lewis’s job. Still others just seem to want
a chance to vent.

Taibbi ticks off the ways Goldman enjoys government
support.
The TARP Exit Subsidy. Under the relevant law, banks
wanting to exit the TARP program were supposed to not face any
obstacles. They could just sent the money in, consult with their
regulator and they’d be out. This was intentionally included in
the law, changing an earlier agreement that the original TARP
banks made to not exit TARP until they got permission.

But Tim Geithner didn’t like this new deal so he ignored it. He
decided to require that the TARP recipients had to issue new
equity and new debt in order to exit. (Later, he eliminated the
equity requirement but it was too late—banks were already issuing
the equity.)

As it turns out, this was a major boon to Goldman, since it got
to underwrite many of the new issues.

Taibbi really nails this one:

So say International Reckless Dickwad Bank needs to issue $100
million in new stock to pay off TARP; they hire Goldman to do the
deal, and since the fee for equity underwriting is 7%, Goldman
gets, in essence, a state-mandated $7 million fee. Because so
much money was lent out under TARP, the underwriters on Wall
Street made a massive bonanza on all the new bank stock. As noted
above, Goldman’s equity underwriting department hauled in $736
million this quarter. Does this happen without the bailouts? No.
Do the bailouts happen if banks like Goldman hadn’t blown up the
universe in the first place? No. You do the math; this is another
subsidy.

Explicit Debt Guarantees. Under the Temporary
Liquidity Guarantee Program, Goldman is basically able to piggy
back on the credit of the United States taxpayers. Goldman issued
$28 billion in FDIC-backed debt under this program. “Exactly how
hard is it for a bank to make a profit when it has unlimited
access to virtually free money? It is almost impossible for banks
to not make money when their cost of capital sinks this low,”
Taibbi writes.

The Discount Window. It’s not well
understood by the broader public how important access to the
discount window is, and how it lowers Goldman’s borrowing costs.
Basically, anyone who lends money to Goldman knows that if
there’s ever a short term liquidity crunch, Goldman can turn
around and borrow from the Fed. This means that lenders face a
lot less risk that Goldman will run into the kind of liquidity
crisis that ruined Bear Stearns, which means they lend to Goldman
at cheaper rates.

The Implicit Guarantee. This is one that Taibbi
misses. (We forgive you Matt.) Goldman is now the equivalent of
Fannie Mae, protected by a market-wide assumption that there is
no way it can ever fail. Its creditors can count on Goldman’s
debt being almost as good as government paper. Except
Goldie Mac is even worse than Fannie, which was at least subject
to supervision by a dedicated federal regulator. (for all the
good that did.) We still haven’t figured out how to
regulate these systemically important, too big to fail monsters.
So we’re just letting them run rampant across America hoping that
someday we’ll discover the financial equivalent of Saint George
to slay the dragon.

The Government Carry Trade. To sum up, Goldman
Sachs is taken advantage of a new trade that was invented in the
midst of the crisis. It’s similar to the old fashioned carry
trade where banks borrowed money in low interest rate currencies
and lent where they could get higher yield. Only these days, the
carry traders don’t have to go abroad to find the low interest
rate. We’ve brought it home to them. They borrow cheap thanks to
this conglomeration of explicit and implicit guarantees, and lend
out at higher rates. If your cost of capital is artificially
cheap, all sorts of trades that would never be profitable in a
free market suddenly become profitable.

As Taibbi points out, this isn’t how it was supposed to work. The
bailout was supposed to be an emergency measure that wouldn’t
permanently warp the market. Main Street was going to benefit as
much as Wall Street. Everyone from Hank Paulson to the
talking-heads on CNBC told us all it was irresponsible populism
to describe this as a giant gift to Wall Street.

“This is the final evidence that the bailouts were a political
decision to use the power of the state to redirect society’s
resources upward, on a grand scale. It was a selective rescue of
a small group of chortling jerks who must be laughing all the way
to the Hamptons every weekend about how they fleeced all of us at
the very moment the game should have been up for all of them.”

None of this, of course, is confined to Goldman. It's now a
systemic risk for which we are all paying the price.

Oh, and as promised, here's the answer to the quiz. The first
quote, with the mention of 'Goldie Mac' is from the Journal. The
other, more sober sounding one, that's Taibbi. Go figure.